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Saturday, 14 June 2014

The Path to Early Financial Freedom, Bicycles Optional

In my hunt for Early Financial Independence, maybe even Early Retirement, I'm unrelenting in my efforts to minimise my spending while not sacrificing the elements of family life that are really important to us. This is essential behaviour as finding ways to minimise spending allows two things to occur:

the reduction in spending allows another advance towards the Financial Independence goal because it can directly become savings; and

importantly by spending less the Financial Independence goal posts also move towards you.

There is however one area where this is not an appropriate course of action – spending required to earn money. Generally, if you were just looking to minimise spending you’d be looking for the highest paying job where housing costs were low and your home would be within a walk or cycle to work. Other considerations for some might include minimising child care or ‘uniform’ costs to name but two. In the extreme this would be home working. This is of course flawed because we need to actually be finding ways to Save Hard and not just spend less. The mathematical way to think about it is Saving Hard is maximised by maximising earnings (which in a family unit could be 2 or more salaries), minus tax, minus national insurance, minus spending required to earn. Of course it’s then appropriate to be unrelenting in your efforts to minimise your spending required to earn.

Let’s demonstrate with my example. My better half and I both have very different specialised occupations which are currently more than 60 miles apart. For me to be close to the workplace of my better half and I’d be looking at a different occupation which would result in a big pay cut. For us to live close to those workplaces we’d also be up for eye wateringly expensive home costs. Should we move close to my work, including my better half taking up employment nearby, to allow that bicycle to come into play for both of us and my better half while being able to stay in the same type of occupation is looking at a big pay cut.

So how have we maximised our ability to save? Firstly, we’re happy to live in a 1 bedroom flat in an ‘up and coming London area’ (read low rent compared to the London average). By compromising here we keep our accommodation costs low while also allowing a short public transport journey from my better halves workplace which keeps one half of our commuting costs to a reasonably low level. I on the other hand have accepted a long commute that takes over an hour each way. To keep this commute both palatable and safe my spending required to earn required a vehicle which was reliable, comfortable, quiet and which contains a nice radio/sound system. What wasn't important to me was 0-62mph in 5 seconds. With both driving style (topic of a work in progress post) and a reasonably fuel efficient engine I'm easily able to achieve commute fuel consumption figures of greater than 75mpg which after then adding all my other car running costs allows this situation to work. Before anybody tries to laugh me out of town
with that claim I will highlight that the car pictured in this post will achieve extra-urban official figures of 91.1mpg. Now of course that’s a relatively new car which probably won’t allow many to maximise savings, plus they’re quoted figures to an EU standard which may or may not exactly reflect reality but I can confirm from experience that very low fuel consumption is possible and can be used to enable scenarios which once upon a time may not have allowed savings to be maximised.

That lifestyle might look extreme to some readers but for us it works and when we compare it to other scenario’s, such as moving so that we can work close to each other while living nearby and then commuting by bicycle or foot, our choice is allowing us to accrue many thousands of extra £’s per annum. This choice then allows financial independence in less than 3 years.

Is my family’s situation unique? How are you maximising your ability to save?

5 comments:

We moved out of London to benefit from the cheaper housing and pay very high commuter fees (train) to ensure our London salaries can continue. For us it was the right balance of improving our current lifestyle (reasonable sized house, country living) with savings (lifestyle & housing).

Firstly, spending money to make money. In your case fuel costs, but could equally apply to buying smarter clothes to look more worthy of a high salary, paying stamp duty to acquire shares, or the costs associated with purchasing property..... in other words, capitalism.

Secondly, spending a little bit of money to make your journey to financial independence more palatable, even if this means it takes a bit longer to get there. You've decided you need a nice sound system for your car, others would live in a larger house, eat better quality food, have more holidays and so on. It's about finding your own sweet spot between Jacob's Early Retirement Extreme methods, and the Average Joe's over indulgence that means freedom never comes.

Personally I'm very lucky to earn a relatively high income in a City where cycling is normal, and this means our combined commuting costs are virtually zero. Obviously this didn't happen completely by accident as we choose to live here and looked for jobs close to home. Oh yeah, and lots of my colleagues run two cars to drive their two short commutes every day, plus the obligatory visit to Tesco at lunchtime to buy their sandwiches - we avoided all that too!

I guess if your job only exists in London then that forces the issue, but as you get close to financial independence, wouldn't you consider a transitionary stage where you took a less stressful job with a shorter commute, perhaps something in a field that related to one of your personal passions or interests, even if it meant freedom day was delayed for a few more years? I think I probably would, especially if it meant I saw my children every morning and every evening before they grew up.

"...even if it meant freedom day was delayed for a few more years?" Now that is the million dollar question that I actually do consider from time to time but have yet to act upon. Your point about "as you get close to financial independence" is the critical one here because obviously as you move closer to FI wealth creation continually shifts from savings to return on investment allowing for the salary reduction without much effect.

Having 75% of the wealth needed for FI I really could do this with little time addition but I think my personality type which says I must execute everything I do to 110% until it's done gets in the way.

Just a thought. Would you not have been better off buying a home few years back when the prices were low. The increase in house value could have more than offset any saving you make by living in one bed room house?

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